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Rating Action:

Moody's downgrades AMC's CFR to B3 following temporary theatre closures due to the coronavirus pandemic; ratings on review for downgrade

24 Mar 2020

Approximately $4.5 billion of rated debt impacted

New York, March 24, 2020 -- Moody's Investors Service ("Moody's") has downgraded AMC Entertainment Holdings, Inc.'s ("AMC" or the "company") Corporate Family Rating (CFR) to B3 from B2 and the Probability of Default Rating (PDR) to B3-PD from B2-PD. Concurrently, Moody's downgraded AMC's credit facilities to Ba3 from Ba2 (consisting of a $225 million revolving credit facility (RCF) and $1.99 billion outstanding senior secured term loan) and $2.3 billion of senior subordinated notes to Caa1 from B3. The Speculative Grade Liquidity Rating was downgraded to SGL-3 from SGL-2. Moody's also placed the long term ratings on review for further downgrade. The full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

The downgrade reflects Moody's expectation for lower revenue and EBITDA this year coupled with weakened liquidity as a result of temporary closures of AMC's theatre circuit in the US (636 theatres) and overseas (368). Last week, AMC announced it will close all of its US theatres for a 6-12 week period beginning 17 March to adhere to the federal government's recommendation that public gatherings should be restricted to ten or fewer individuals and people should engage in social distancing due to the widespread coronavirus pandemic (a.k.a., COVID-19). Similar mandates have been enacted by national governments across Europe, which have led to theatre closures in the UK, Ireland, Italy, Spain, Norway and other regions where AMC operates. While Moody's expects leverage to rise significantly to the 8x-9x range (Moody's adjusted) in 2020 due to lower EBITDA, as the virus threat is neutralized, theatres reopen and EBITDA expands with moviegoers gradually returning to the cinema for what is expected to be a relatively strong movie slate next year, we project leverage will subsequently decline to the 7x area and free cash flow generation will continue to be modestly negative in 2021.

The review for downgrade reflects the numerous uncertainties related to the economic impact of COVID-19 on AMC's cash flows and liquidity, especially if the virus continues to spread forcing AMC to keep its theatres closed beyond June and various government financial aid programs for the theatre industry are delayed. Under this scenario, the ratings could be downgraded if Moody's expects that AMC will exhaust its existing internal and external liquidity sources, the company is unable to access additional lines of credit and/or the headroom under its springing financial covenant decreases due to draws under its revolvers combined with higher-than-expected EBITDA shortfalls.

As this global crisis unfurls, AMC's balance sheet is highly levered and annual free cash flow generation is modestly negative due to sizable debt incurred in prior years to finance acquisitions that facilitated expansion into new markets and geographies, creating the world's largest movie exhibitor. At 31 December 2019, financial leverage was 6.6x (as calculated by Moody's) and LTM free cash flow was -$23 million. Notably, AMC delivered strong operating performance in Q4 2019 owing to the release of several big franchise films, which led to solid operating cash flow of $483 million (Moody's adjusted) and positive free cash flow generation of approximately $180 million in the quarter. At 31 December 2019, unrestricted cash balances totaled $265 million and undrawn revolver availability was $332 million. This level of liquidity combined with meaningful cost cutting measures should enable AMC to absorb negative operating cash flows that Moody's projects the company will incur through the first half of 2020.

Like most cinema operators, AMC has a highly variable cost structure and can quickly reduce operating costs by up to 75% in the short-run. Moody's fully expects the company to implement plans to minimize its cash burn as much as possible during the closure period via a combination of natural expense reductions (i.e., costs not incurred while theatres are closed) and management actions aimed at reductions in maintenance, utilities, payroll and theatre-level operating costs. With respect to the fixed rent costs for its theatres, Moody's expects AMC will likely seek to obtain cash relief or rent deferrals during the closure period and beyond, if necessary. In certain European countries, AMC has legal protections, which enable the company to mitigate substantially all of its rent costs. In continental Europe, governments have announced state subsidies to cover payroll costs. The UK government is the current outlier with respect to payroll subsidies, but AMC and other cinema operators are currently working with the UK Cinema Association to lobby for such support. In the US, the National Association of Theatre Owners (NATO) is lobbying the US Congress to urgently pass an emergency economic relief bill to provide financial assistance to the movie theatre industry. The aid package is designed to relieve the ongoing cost burden during the closure period, provide tax benefits to assist employers with providing support to employees and offer government loan guarantees to help ease the liquidity squeeze.

Even before the coronavirus outbreak forced AMC to shut its theatres, the company had planned to reduce operating costs this year by $50 million via operational and process improvements to expand margins. AMC also reduced the annual dividend to $12 million from $84 million to improve free cash flow generation. In view of the theatre closures, Moody's expects AMC to significantly reduce its net capex this year from the originally planned $275 - $300 million to help preserve cash and reduce cash outlays.

Given the possibility of its theatres remaining closed for up to three months, Moody's expects the lack of revenue generation, combined with the ongoing need to pay certain fixed expenses and debt-servicing costs, will weaken AMC's liquidity. Nonetheless, during this three-month period, we expect the company's existing liquidity sources to cover the cash burn. To the extent AMC is able to reopen its theatres by mid-June and patrons gradually return to its cinemas, the company in conjunction with the major film studios could offer promotions plus early releases and re-releases of certain premium movies to stimulate moviegoer demand, especially during the summer months when AMC typically experiences a seasonally strong box office.

The primary risk to AMC over the short-run would be a prolonged outbreak, causing its theatres to remain closed for an extended period beyond June coupled with an exhaustion of its existing sources of liquidity and an inability to timely access new liquidity sources to cover the cash burn into Q3 2020. To the extent the US emergency economic relief bill for cinema operators as currently drafted is passed and signed into law, this could improve AMC's ability to access additional credit lines from its banks, if this becomes necessary. The secondary risk to AMC is the headroom under its springing covenant, which could decrease rapidly due to draws under its two revolvers (US: $225 million; UK: GBP100 million) combined with a substantial decline in EBITDA. The maximum net senior secured leverage covenant of 6x is triggered if more than 35% of the domestic RCF is drawn. At 31 December 2019, the cushion was substantial at roughly 80%. Assuming AMC fully drew under its revolvers, EBITDA would have to decline more than 65% to breach the covenant.

To the extent AMC's theatres reopen by mid-June, Moody's does not expect attendance to be strong in the second half of the year given that 2020 was already expected to be a weak year for big budget tentpole film debuts and movie studios have: (i) postponed releases of several films by pulling them off the spring and summer calendars due to the outbreak and pushing their releases later into 2020 or 2021; (ii) opted to simultaneously debut new films direct-to-consumer on subscription video on demand (SVOD) streaming platforms; or (iii) released movies earlier-than-normal to streaming platforms. Further, Moody's expects some consumers will be hesitant to visit theatres even after the outbreak has subsided while some moviegoers will reduce their out-of-home entertainment activities and instead watch high quality movies at home given the growing number of providers offering premium SVOD content. The stay-at-home safety measures put in place during the COVID-19 outbreak could accelerate this type of consumer behavior and some individuals could spend more time viewing movies at home even after the disease has been contained and theatres reopen. Moviegoer demand will likely remain strong for big budget "cultural event" premium films while in-home viewing will be reserved for low or medium-budget second-tier films. Despite these challenges, Moody's expects cinema operators to remain an integral part of film studios' distribution of their movie content and a key destination for consumers seeking affordable out-of-home entertainment.

ESG CONSIDERATIONS

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The movie theatre sector has been one of the sectors most significantly affected by the shock given its sensitivity to consumer demand and sentiment. More specifically, the weaknesses in AMC's credit profile, including its exposure to the US and Europe have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and AMC remains vulnerable to the outbreak's continuing spread. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on AMC of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.

The review will focus on AMC's ability to reopen its theatres and the resulting timetable, the impact on liquidity as the coronavirus containment efforts continue, the extent to which attendance revives and AMC's prospects for returning to positive operating cash flow. Access to substantial additional sources of liquidity to cover a longer-than-expected cash burn period would also be considered as part of the review.

SUMMARY OF TODAY'S RATING ACTIONS

Ratings Downgraded:

..Issuer: AMC Entertainment Holdings, Inc.

Corporate Family Rating, Downgraded to B3 from B2, Placed On Review For Downgrade

Probability of Default Rating, Downgraded to B3-PD from B2-PD, Placed On Review For Downgrade

$225 Million Revolving Credit Facility due 2024, Downgraded to Ba3 (LGD2) from Ba2 (LGD2), Placed On Review For Downgrade

$1,985 Million Outstanding Senior Secured Term Loan B1 due 2026, Downgraded to Ba3 (LGD2) from Ba2 (LGD2), Placed On Review For Downgrade

GBP500 Million (US$ 655.8 Million) 6.375% Senior Subordinated Notes due 2024, Downgraded to Caa1 (LGD5) from B3 (LGD5), Placed On Review For Downgrade

$595 Million 5.875% Senior Subordinated Notes due 2026, Downgraded to Caa1 (LGD5) from B3 (LGD5), Placed On Review For Downgrade

$475 Million 6.125% Senior Subordinated Notes due 2027, Downgraded to Caa1 (LGD5) from B3 (LGD5), Placed On Review For Downgrade

..Issuer: AMC Entertainment Inc.

$600 Million 5.750% Senior Subordinated Notes due 2025, Downgraded to Caa1 (LGD5) from B3 (LGD5), Placed On Review For Downgrade

Speculative Grade Liquidity Actions:

..Issuer: AMC Entertainment Holdings, Inc.

Speculative Grade Liquidity, Downgraded to SGL-3 from SGL-2

Outlook Actions:

..Issuer: AMC Entertainment Holdings, Inc.

Outlook, Changed to Rating Under Review from Stable

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Leawood, Kansas, AMC Entertainment Holdings, Inc. is the largest movie exhibitor in the US and globally, operating 1,004 movie theatres with 11,041 screens across the US, Europe and the Middle East. The company is

50% owned by Dalian Wanda Group Co., Ltd. (Wanda). Revenue totaled approximately $5.5 billion for the fiscal year ended 31 December 2019.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Gregory A. Fraser, CFA
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Stephen Sohn
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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